The Office for the Superintendent of Financial Institutions has released the guidance it developed for the committee that’s working on a new capital adequacy framework for the life insurance sector that would allow firms to utilize their internal models.

Today, OSFI released the guidance that was requested by the MCCSR Advisory Committee to help develop proposals for a new solvency assessment framework for Canadian life insurers based on internal models.

OSFI said it believes that the guidance will help companies “make informed decisions with respect to their intent to develop and implement internal models for regulatory capital purposes.”

The guidance deals with elements of the development process such as: setting out the risks for which regulatory capital requirements may be determined; the degree of model standardization appropriate for each risk; the way in which the requirements for individual risks are to be combined; the extent to which diversification, correlation and concentration across risks, products, business lines and legal entities are to be incorporated in the calculation of the supervisory and company target capital requirements; the extent to which risk mitigation strategies may be factored in; and, various implementation considerations.

Additionally, it provides some clarifying information on the basic solvency framework, “in particular, the anticipated interaction of the new standard and internal models approaches to solvency assessment, and the likely timeframe for implementation of the internal models approach.”

OSFI currently expects that it will be 2014, or later, before any company receives approval to use an internal model to determine the regulatory capital requirement for any of the risks identified in the guidance. “The precise date when OSFI will begin to approve the use of internal models for determining regulatory capital requirements will depend on the availability and completeness of comparative data and results from across the industry, the robustness of the models themselves and other factors,” it says. “Should development of the framework for internal models proceed more quickly than currently anticipated, some companies may be able to receive approval prior to 2014 to use an internal model to determine the regulatory capital requirement for selected risks.”

IE